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Yesterday, the Ninth Circuit court of appeals issued a decision affirming Judge Robart’s RAND decision in the much watched Microsoft v. Motorola case, basically ruling that the determination of a reasonable and non-discriminatory (RAND) royalty rate and Motorola’s breach of its RAND commitments were reasonable based on the specific procedural and evidentiary issues presented. This case provides good insight into procedural and evidentiary issues that those litigating standard essential patents (SEPs) should consider, which can have a significant impact on the outcome of a case, as they did here.

Background

This case is but one of many between Microsoft and Motorola. In early October 2010, Microsoft sued Motorola for patent infringement of smartphone-related patents in both the U.S. International Trade Commission (ITC) and W.D. Washington district court. Later that month, Motorola sent two letters to Microsoft offering a license under Motorola patents asserted to be essential to the IEEE 802.11 WiFi standard and the ITU-T H.264 video encoding standard, respectively, and seeking a royalty of 2.25% of the price of Microsoft end products that use that technology — e.g., XBox with WiFi or Windows with video encoding capability. (see our April 25, 2013 post for more detail about the pre-suit timeline). A week or so later, Microsoft filed the instant case against Motorola seeking a declaratory judgment that Motorola had breached its RAND licensing obligations. (see our May 6, 2013 post for a review of the initial pleadings). Motorola then sued Microsoft in W.D. Wisconsin district court seeking to enjoin Microsoft from using the H.264 patents and also sued Microsoft in the ITC seeking to exclude importation of Microsoft’s Xbox products. The district court cases were consolidated before Judge Robart in W.D. Washington district court.

German Injunction. In the meantime, the global patent dispute between the parties continued. In July 2011, Motorola sued Microsoft in Germany for infringing a German patent directed to the H.264 video encoding standard. A trial was held in December 2011 and several months later, in April 2012, the German court awarded Motorola an injunction against Microsoft. While that German action was pending, Microsoft relocated one of its distribution centers out of Germany given the injunction threat. The German injunction is not self enforcing; rather, Motorola must post a bond to secure Microsoft against damages caused by the injunction if it ultimately is overturned on appeal and Microsoft also would have an opportunity to seek a stay of that injunction.

Microsoft also asked Judge Robart in the instant case to enjoin Motorola from seeking any injunctions — including enforcement of any injunction awarded in the German action — pending resolution of the SEP issues presented in this case. Judge Robart granted that injunction. In a decision to haunt Motorola later, Motorola appealed Judge Robart’s injunction ruling to the Ninth Circuit–rather than the Federal Circuit–where Motorola argued that “[b]ecause Microsoft’s complaint is pleaded in terms of contractual rather than patent rights”, appellate jurisdiction properly lies withing the regional circuit’s general jurisdiction (the Ninth Circuit), rather than the Federal Circuit’s subject matter jurisdiction over patent law. The injunction was affirmed by the Ninth Circuit, which ruled that it properly had jurisdiction over the case (see our May 6, 2013 post discussing the injunction and appeal). In November 2012, Judge Robart later granted Microsoft’s motion to dismiss Motorola’s claims for injunctive relief and barring Motorola from seeking such relief against Microsoft in any country based on patents essential to the 802.11 WiFi or H.264 video encoding standards. (see our Jan. 3, 2013 post).

Soon thereafter, in January 2013, the U.S. Federal Trade Commission (FTC) announced a consent decree agreement with Google/Motorola (Google having acquired Motorola Mobility in 2012) where Motorola agreed to a specific procedure for licensing SEPs before Motorola would seek injunctive relief, which procedure includes an opportunity for a tribunal to determe licensing terms. (see our Jan. 3, 2013 post).

RAND Determination (Bench Trial). In November 2012, Judge Robart held a bench trial to determine what would be a range of reasonable RAND royalty rates as well as what would be the specific RAND royalty rate to apply here. He later requested and received additional submissions about a licensing agreement that Google– which now owned Motorola–had entered with MPEG LA on a patent pool directed to the H.264 standard. (see our Jan. 24, 2013 post, Feb. 22, 2013 post and Mar. 4, 2013 post).

On April 25, 2013, Judge Robart issued a first-of-its-kind ruling to set a RAND royalty for the Motorola 802.11 and H.264 patents with respect to Microsoft’s alleged infringing products. (see our April 25, 2013 post; see also our May 1, 2013 post for annotated version of this decision). He found a RAND royalty rate of 0.555 cents per unit (from a reasonable RAND range from 0.555 to 16.389 cents per unit) for Motorola’s H.264 video encoding patents. He found a RAND royalty rate of 3.471 cents per unit (in a range from 0.8 to 19.5 cents per unit) for Motorola’s 802.11 WiFi patents. Both of these rates fell very far below the 2.25% of the end unit selling price (about $4.50 per $199 Xbox) that Motorola requested in its initial offer letters that led Microsoft to file the instant case.

Judge Robart’s over-200-page decision was premised on a modified Georgia-Pacific royalty rate with “economic guideposts” in which he removed factors deemed at odds with an obligation to license patents on a non-discriminatory basis — e.g., remove a factor that would consider whether parties are competitors, which typically would indicate a higher royalty rate would be sought if a patent owner were licensing a competitor to use the technology. (see our Apr. 26, 2013 post on the modifiedGeorgia-Pacific analysis).

Breach Determination (Jury Trial). The next step was determining whether Motorola breached its RAND commitment. Judge Robart ruled that this was a fact sensitive issue for the jury that was not controlled by any single fact detached from the underlying circumstances — e.g., Motorola’s seeking an exclusion order or the high amount sought in Motorola’s initial license offer to Microsoft. (see our Aug. 12, 2013 post). The jury trial started in August 2013 and the jury ultimately found that Motorola breached its RAND obligations. (see our Sep. 4, 2013 post; see also our Aug. 27, 2013 post previewing the jury trial).

A few weeks later, Judge Robart ruled that sufficient evidence supported the jury’s verdict. He found that the essence of Microsoft’s various RAND-breach theories to be “whether Motorola’s conduct violated the duty of good faith and fair dealings.” No particular factors were deemed dispositive by themselves, but evidence of Motorola’s course of conduct supported the verdict, including factors relating to Motorola’s initial offer letters, Motorola’s seeking injunctive relief, and Motorola’s going after Microsoft based on WiFi chips within the accused products, rather than going after the WiFi chip manufacturer Marvell. (see our Sep. 26, 2013 post).

Judge Robart then issued a Rule 54(b) judgment–i.e., a final judgment on some, but not all, claims–that would allow the parties to appeal the RAND issues while the remaining claims in the case were stayed pending the appeal. Specifically, he entered Rule 54(b) judgment in Microsoft’s favor on (1) Microsoft’s breach of contract claim; (2) Judge Robart’s prior RAND ruling; and (3) Motorola’s claim for a declaration that Microsoft repudiated RAND licensing rights by not negotiating a license. (see our Nov. 12, 2013 post).

Appeal To Ninth Circuit Via Federal Circuit. Motorola promptly appealed to the Federal Circuit, which may have been deemed a more favorable forum for a patent owner than the a generalist regional court such as the Ninth Circuit. But Microsoft move to transfer the case to the Ninth Circuit because, among other things, Motorola previously appealed the injunction issue to the Ninth Circuit, which ruled it had jurisdiction over the matter as a contract action. Without deciding the merits of whether the Federal Circuit or Ninth Circuit had jurisdiction, the Federal Circuit agreed that law of the case required the Federal Circuit to respect the Ninth Circuit’s ruling that it has appellate jurisdiction over this matter. So the appeal was transferred to the Ninth Circuit. (see our May 5, 2014 post; for summary of the parties briefs on the motion, see our Nov. 25, 2013 post, Dec. 10, 2013 post and Dec. 16, 2013 post).

The appeal then proceeded in the Ninth Circuit. (see our Apr. 7, 2015 post discussing party and amicus briefs). The Ninth Circuit held oral argument in April 2015. One of the appeal issues that became clearer during argument was Motorola’s challenge to Judge Robart’s bifurcated procedure where (1) the judge held a bench trial and determined a RAND royalty rate and range and then (2) held a jury trial to determine whether Motorola breached its RAND obligation. Motorola argued this was prejudicial error, because the jury was required to accept the judge determined RAND rate without Motorola challenging any of the basis that supported it. Microsoft argued that Motorola had agreed to this procedure and cannot be heard to complain about it now. (see our Apr. 8, 2015 post summarizing the argument and providing link to video of argument; see also our Apr. 7, 2015 post that summarized the case up to the date of oral argument).

Decision

Contract Case or Patent Case. The first issue was whether the Ninth Circuit or the Federal Circuit has appellate jurisdiction over this case. The court ruled that its exercising jurisdiction over the injunction interlocutory appeal as well as the Federal Circuit’s decision to transfer the case to the Ninth Circuit were both law of the case. That doctrine requires substantial deference to those prior decisions on appellate jurisdiction except in certain circumstances, such as the prior decision was clearly erroneous, there have been changed circumstances or to avoid manifest injustice. None of those circumstances existed here.

In applying the law of the case standard, the court ruled that a contract dispute does not arise under law merely because the contract is a patent license:

A complaint that alleges breach of contract and seeks damages sounds in contract; its nature does not change because the contract is a patent license. Even if a court, in interpreting a contract and assessing damages, deems it appropriate to apply the law of patent infringement, that of itself does not change the complaint into one arising under the patent law.

Motorola points out that the Federal Circuit has exercised jurisdiction in some breach-of-contract cases. But those cases involved questions of patent infringement, patent validity, or claim construction, or included an embedded, outcome-determinative interpretation of a patent law statute. This case, in contrast, is a straight breach of contract action.

Calculation of appropriate royalty amounts in contractual patent license cases involves similar determinations to those that arise when calculating damages in patent infringement cases. So there is some overlap in that regard between breach of patent license cases and Federal Circuit patent infringement cases. But Motorola has cited no case in which the Federal Circuit has exercised jurisdiction over a breach of contract claim for damages where the mode of calculating contract damages, not any pure patent issue, was at stake. [internal quotations ommitted].

In another part of the decision, the court similarly stated that reference to Federal Circuit patent damages law may be proper in the contract action, but does not convert this into a patent case:

We reiterate that this is not a patent law action. Still, the Federal Circuit’s patent law methodology can serve as guidance in contract cases on questions of patent valuation. The district court’s analysis properly adapted that guidance to the current context.

Motorola Consented To Bench Trial on RAND Royalty Rate. The court ruled that Motorola affirmatively consented to Judge Robart having a bench trial, rather than a jury trial, to determine a RAND royalty rate for each SEP portfolio. The court found that Judge Robart “quite reasonabley” determined that a “true RAND royalty rate for Motorola’s SEPs was an important fact for the jury to consider in determining whether Motorola breached its good faith obligations under the RAND agreements.” Judge Robart asked the parties how they would like to proceed in determining that and both parties agreed that “the court [will] decide all the material terms of the RAND license.” But they left open the question of who would determine “the question of Motorola’s breach of its contractual obligation of good faith and fair dealing”, which Motorola later requested be determined by a jury.

In deciding that Motorola had waived a jury trial on this issue, the court did make special note that Motorola had not raised to Judge Robart or the Ninth Circuit a “Seventh Amendment claim [of right to trial by jury] with respect to the RAND rate bench trial itself.” Given Motorola’s waiver, “[w]e therefore do not consider whether, absent consent, a jury should have made the RAND determination.”

Hypothetical Negotiation Date. The court’s review of the hypothetical negotiation — or what they called a “Hypothetical Agreement” — focused mainly on Motorola’s argument about the date of such hypothetical. The court found that the method for calculating a RAND rate was “generally [consistent] with Motorola’s approach” and that “[g]enerally, the court credited Motorola’s experts; where it did not, it provided reasoned explanations for not doing so,” stating:

The framework settled on was “generally [consistent] with Motorola’s approach.” Applying that approach, the district court sought to approximate the royalty rates upon which the parties would have agreed by setting up a hypothetical negotiation between the parties. In doing so, the court carefully thought through the “factors an SEP owner and implementer woudl consider” in an actual negotiation directed at licensing a patent subject to RAND commitments. The court then discussed each of Motorola’s fifteen H.264 patents and eleven 802.11 patents, considering the objective value each contributed to each standard, given the quality of the technology and the available alternatives as well as the importance of those technologies to Microsoft’s business. Finally, the court performed a meticulous analysis of the testimony of eighteen witnesses, including executives, economists, and technology experts, to sort out which evidence to rely upon in determining the RAND royalty rate. Generally, the court credited Motorola’s experts; where it did not, it provided reasoned explanations for not doing so.

The court found that Motorola’s primary challenge was the requirement in Georgia-Pacific Factor 15 that the hypothetical negotiation occurs “at ‘the time the infringement began.'” The court agreed that Judge Robart had, to some extent, considered “the present-day value to Microsoft of Motorola’s patents,” but ruled that “[t]his partial present-day focus did not … render the district court’s RAND-rate determination invalid.” The court gave four reasons here.

First, the Federal Circuit has “never described the Georgia-Pacific factors as a talisman for royalty rate calculations” and agreed with Judge Robart’s approach to eliminate or modify factors to fit the circumstances of the case presented. Here, Microsoft claimed that Motorola’s breach of contract was on-going, so Judge Robart reasonably could have “include[d] the present-day value of Motorola’s SEPs as a factor in calculating the RAND rate-and-range for use in the breach-of-contract proceeding.”

Second, “Motorola never specifies the past date the district court should have used.” Motorola referred to both the date Microsoft’s alleged patent infringement began and the date Motorola sent Microsoft offer letters; but “Motorola did not mention either date in putting forth its version of the hypothetical negotiation analysis in its post-trial brief.” Further, “the ‘infringement’ at issue in this case is Motorola’s breach of contract, not Microsoft’s use of Motorola’s patents,” and such breach “was not tied to any specific date.”

Third, both parties offered “volumes of data” and “Motorola itself” urged Judge Robart to consider studies and reports from different time frames. Thus, “[a]s the data presented was not pinpointed to a past date, the district court’s approximation from that data also could not be tied to a specific historical moment.”

Fourth, “Motorola has not shown–nor has it even argued–that it was prejudiced by the court’s analysis.” Rather, Motorola pointed to only one material change since the dispute began: Google bought Motorola in 2012. Judge Robart considered Google’s broad commercial interests in the patent pools. But Motorola explained no prejudice from that:

But Motorola has not explained how it was prejudiced by consideration of Google’s interests. In fact, Microsoft maintains, persuasively, that Motorola benefited from the court’s conflation of Google and Motorola, as Google, a “sophisticated, substantial technology firm[] with [a] vast array[] of technologically complex products,” would obtain more value from the pool than would Motorola as an independent entity.

The court concluded that Judge Robart properly applied the hypothetical approach under the circumstances:

In sum, given the need for flexibility in determining a royalty rate for a RAND-encumbered patent, and given that Motorola has not shown that the court’s consideration of the companies’ circumstances at the time of the bench trial prejudiced it, the district court’s RAND order properly applied the hypothetical agreement approach.

Comparable Licenses. The court next considered Motorola’s argument that Judge Robart put too much emphasis on patent pools and not enough on Motorola’s historical licenses. Judge Robart did credit Motorola’s experts concern that patent pools license at lower rates than licenses entered in bilateral negotiations given, for example, non-monetary value in the patent pools such as grant-back of licenses to other pool member patents. But he accounted for that by multiplying the pool rates by three. Although Motorola argued this still was not enough, this was just one factor Judge Robart used and, for the 802.11 patents, it ended up “being the most favorable to Motorola.”

For the H.264 patents, the patent pool considered “were essential to the same technical standards, and Motorola provided no evidence that its patents were more valuable than the other patents in the pool”; “[i]fi anything, the record indicates that Motorola’s patents were on average less valuable than other H.264 patent.”

Many of the Motorola patents apply only to interlaced rather than (the more advanced) progressive video. Motorola offered some evidence suggesting that interlaced video coding was still valuable to Microsoft, but it did not show that support for interlaced video was more important to Microsoft than other video-coding capabilities. Motorola therefore was not prejudiced by the court’s assumption that its patents were of roughly equal value to those in the pool, as they probably were worth less.

With respect to Motorola’s historical licenses showing royalty rates close to the 2.25% Motorola offered Microsoft, “[i]n the current context … it was not clear error to reject the past licenses as too contextually dissimilar to be useful to the RAND rate calculation.”

Judge Robart “reasonably concluded that … VTech licenses were not reliable indicators of the RAND royalty rate” where VTech entered a license under Motorola’s cell phone patents to avoid litigation and “paid only trivial royalties” for the 802.11 and H.264 part of the much broader licensing agreement.

The RIM Agreement provided a blended rate for all Motorola patents (whether or not essential to a standard) that made it “impracticable to isolate, or apportion the value of the 802.11 and H.264 SEPs, particularly given the evidence that Motorola’s cell phone patent portfolio was highly valuable and likely dictated the terms of the agreement.” Further, the RIM agreement was entered “to resolve an ongoing infringement dispute … further diminishing its trustworthiness as an indicator of a free-standing RAND rate.”

Similarly, the Symbol Technology agreements were “formed under threat of litigation, included monetary caps, and provided licenses for Motorola patents that expired before Motorola and Microsoft’s hypothetical agreement would have occurred.”

Thus, Judge Robart “provided reasonable explanations for giving the Motorola bilateral licenses little to no weight” and “Motorola does not address any of those explanations.”

Based on the foregoing, the court affirmed Judge Robart’s royalty rate determination, stating:

In sum, in determining the RAND rate and range for each SEP portfolio, the district court engaged in a thoughtful and detailed analysis, giving careful consideration to the parties’ briefing and evidentiary submissions, and to the testimony. Although Motorola criticizes the district court’s approach, it provides no alternative other than strict adherence to the Georgia-Pacific factors, without accounting for the particulars of RAND agreements–a rigid approach disapproved of by the Federal Circuit inEricsson. We conclude that the court’s RAND determination was not based on a legal error or on a clearly erroneous view of the facts in light of the evidence.

Jury’s Breach Verdict. The court found that evidence supported the jury’s verdict that Motorola breached its RAND commitment based on Motorola’s injunction related activity and overall course of conduct, where “the only damages argued for and awarded were tied to the fees for defending the injunctive actions and the costs of moving Microsoft’s European distribution facility out of Germany.” The court noted that, for the allged breach based on Motorola’s injunction action, the jury was instructed that it should consider the following factors “alone or in combination”:

(1) Whether Motorola’s actions were contrary to the reasonable and justified expectations of other parties to the contract; (2), whether Motorola’s conduct would frustrate the purpose of the contract; (3), whether Motorola’s conduct was commercially reasonable; (4), whether and to what extent Motorola’s conduct conformed with ordinary custom or practice int he industry; (5) to the extent the contract vested Motorola with discretion in deciding how to act, whether Motorola exercised that discretion reasonably; (6), subjective factors, such as Motorola’s intent and whether Motorola had a bad motive.

Microsoft presented “significant evidence” under those instructions for a jury to “infer that the injunctive actions violated Motorola’s good faith and fair dealing obligations.” The “jury could conclude that Motorola’s actions were intended to induce hold-up, i.e., to pressure Microsoft into accepting a higher RAND rate than was objectively merited, and thereby to frustrate the purpose of the contract.” For example, consumers would not buy Microsoft products that were enjoined from having WiFi or playing back standard video. Motorola’s requested royalty also was “significantly higher” than the court determined RAND rate, “suggest[ing] that Motorola sought to capture more than the value of its patents by inducing holdup.” Further, Motorola filing the lawsuit immediately after expiration of the time Motorola requested for Microsoft to respond to the initial license offers indicated that the offers were just for show so that Motorola could at least say it had made an offer.

Motorola also filed the injunction suits after Microsoft filed the instant suit. The instant suit could establish RAND rates to ultimately compensate Motorola so that Motorola would not suffer the irreparable harm needed to support injunctive relief:

Motorola’s injunction suits were also brought after Microsoft filed its breach of contract lawsuit with the district court. At that point, Motorola was aware that the present lawsuit could establish RAND rates. A patentee subject to FRAND commitments may have difficulty establishing irreparable harm.

Here, had Motorola accepted the RAND rates, it would then be fully compensated for Microsoft’s infringing use. The jury could have inferred, from that circumstance, that the injunctive actions were not motivated by a fear of irreparable harm, as payment of the RAND rate would eliminate any such harm. In the absence of a fear of irreparable harm as a motive for seeking an injunction, the jury could have inferred that the real motivation was to induce Microsoft to agree to a license at a higher-than-RAND rate. [internal citations omitted].

Further, Motorola had “knowledge that pursuing an injunctive action could breach its duty of good faith and fair dealing” based on the FTC investigation that culminated in a consent decree limiting circumstances when Motorola would seek injunctive relief.

The court made clear that the foregoing evidence may support the jury verdict, but “is susceptible to contrary interpretations as well.” Here, “it was for the jurors to assess witness credibility, weight the evidence, and make reasonable inferences.”

Damages. The court considered Motorola’s argument that damages based on Microsoft’s attorneys fees and litigation costs in connection with the injunction activity is barred by the Noerr-Penningtondoctrine, which is a First Amendment right to access the courts that shields individuals from liability for engaging in litigation. But courts have found that doctrine “does not protect patent holders from liability for asserting rights in violation of a commitment not to enforce those rights.” The court ruled that “[e]nforcing a contractual commitment to refrain from litigation does not violate the First Amendment; if it did, every settlement of a lawsuit would be unenforceable as a Noerr-Penningtonviolation,” stating:

As we explained in Microsoft I, a patent-holder who signs “such a sweeping promise” as a RAND agreement “at least arguably … guarantee[s] that the patent-holder will not take steps to keep would-be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made.”

The jury concluded that in these specific circumstances, seeking injunctive relief violated Motorola’s contractual RAND obligations. The Noerr-Pennington doctrine does not immunize Motorola from liability for that breach of its promise.

The court limited its ruling to the instant jury determination in these circumstances, and held that a RAND commitment does not always preclude filing an injunction action:

We agree with the Federal Circuit that a RAND commitment does not always preclude an injunctive action to enforce the SEP. For example, if an infringer refused to accept an offer on RAND terms, seeking an injunctive relief could be consistent with the RAND agreement, even where the commitment limits recourse to litigation. The pertinent question is whether Motorola’s obligation of good faith and fair dealing under its RAND agreements precluded it from seeking an injunction in these circumstances. That question was for the jury to decide. [emphasis in original]

The court also went through a rather long analysis of whether Washington state law precluded an award of attorneys fees as damages. The court ultimately concluded such damages would be allowed by a Washington court “where a party’s injunctive actions to enforce a RAND-encumbered patent violate the duty of good faith and fair dealing.”

Evidentiary Rulings. The court reviewed two evidentiary rulings and ruled that Judge Robart did not abuse his discretion in allowing the challenged evidence.

First, Motorola challenged Judge Robart allowing the jury to receive not only the court’s bench trial RAND royalty rate determination ruling, but the full findings of fact and law of the opinion supporting that determination. The court found this was a “close[] question.” It ultimately ruled there was no abuse of discretion given that Motorola had waived its right to trial by jury on the RAND rate determination issue and Motorola had agreed to the bifurcated procedure. Allowing the jury to make its own underlying factual findings that underly the judge-determined RAND rate would render that judge-determination “a nullity–a bare set of numbers, divorced from their context and meaning.”

Second, Motorola challenged the admission of evidence concerning the FTC investigation of Motorola that culminated in the FTC-Google/Motorola consent decree concerning injunctive relief for SEPs. Although consent decrees may not be admitted to prove the truth of the government’s allegations underlying the consent decree, they may be used for other purposes such as showing notice or knowledge. Here, the evidence was entered “to show that Motorola was aware the FTC (and Microsoft) found its conduct questionable enough to merit investigation.” Further, this evidence “was undoubtedly probative” given similar issues in the instant case and the FTC investigation, which could have led the jury to believe the FTC instituted the investigation because it may have merit and to infer that Motorola settled because it believe its actions were wrongful. Any prejudice from this would be cumulative of the submission of that stemming from admission into evidence of the FTC’s statement in the ITC proceedings. And Motorola did not object to admission of that evidence.

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